Market News & Insights
20 January 2015

Caution: What if the ECB fail to Deliver?

EUR/USD 1.1578
GBP/USD 1.5140
GBP/EUR 1.3060 (0.7656)
EUR/CHF 1.0139
GBP/CHF 1.3238
GBP/AUD 1.8440

Yesterday was very much a day of consolidation across markets, the US was on holidays and European markets appeared content to consolidate following last week’s turmoil and ahead of a week of major event data and risk. We warned yesterday that we had concerns on other central bank pegs to the EUR and the Danish peg was one we were looking at, it didn’t take long to see action on this with the Danish central bank joining the SNB in cutting their deposit rate further into negative territory to -.2% from -.05%. In European markets equities were little changed on the day following last week’s rally as investors now look ahead to the ECB meeting on Thursday and the potential scale of ECB asset purchases. The IMF has followed the World Bank in downgrading global growth forecasts despite falling fuel prices, while they also upgraded their growth target for the US, again in line with the World Banks actions. Oil remains pinned below $50 per barrel, while gold has risen to fresh 3 month highs as uncertainty drives investors to look towards alternate assets.

The USD was an underperformer through yesterday’s session, although the moves were limited and likely just traders covering recent moves ahead of this week’s key event risk. The EUR was also marginally stronger across the board but again this appears to be covering last week’s heavy selling, as opposed to fresh demand for the single currency. In overnight market risk was well supported with Asian equities trading higher, helped by better than expected Chinese GDP printing growth of 7.3% versus 7.2%. It is worth noting however that this is the slowest growth the country has seen since 1990. In currencies overnight we saw the JPY face selling as the safe haven lost out to a more positive risk environment, while the AUD faced some selling after a report from Blackrock Group suggesting the Aussie could decline as much as 17% this year, the USD has been looking to recoup some of its losses through yesterday, with GBPUSD bucking the trend rallying from overnight lows towards 1.5050 to trade above 1.5125 as I type.

It is almost impossible to avoid the news flow surrounding this week’s ECB meeting, expectations have built up to fever pitch and the pressure is now well and truly on the ECB to deliver, if they fail to provide the market what it wants, the risk of a EUR rally from recent lows is high. Eurozone and German economic sentiment tops this morning’s data releases in the form of ZEW survey, recently the forward looking component of the reading has improved and is expected to again, the long term impact on the EUR will likely be limited as it trades just above 11 year lows against the USD and 7 year lows against GBP. While the consensus is the ECB will deliver the kitchen sink, we cannot highlight enough that if the ECB fail to deliver or even drag their heals somewhat that the risk of a euro rebound is high, Mario Draghi and co have been masters of verbal intervention, they have achieved an awful lot in terms of currency devaluation without any real commitment, however the impact of no real action is evident in the Eurozone economy and the deflationary environment we now find ourselves in.

US and UK data remains light through today. Tomorrow we have the release of the BOE’s January minutes as well as labour market data from the UK. We discussed the risks of a change in the voting stance of the MPC, should we see a shift away from 7-2 voting, with either of the 2 voting for rate hikes changing their tune, the pound will likely find itself facing selling pressures as the interest rate hike expectations get pushed further down the curve. On the positive side, the pound is expecting wage growth, with average weekly earnings expected to have risen 1.7% from 1.4%, rising wages in the UK while price growth is slowing puts the consumer on a stronger position and can give GBP crosses plenty of rationale to push higher.